American Consumer Spending Slowdown

The American consumer, a resilient force in the economy, has been confronting a complex financial landscape characterized by soaring prices and rising interest rates. Their persistent willingness to spend despite these challenges has been a key factor in maintaining the relative strength of the U.S. economy. However, this trend might be on the cusp of a significant shift, driven by a confluence of economic pressures such as high housing costs, increasing credit card debt, and diminishing savings. Experts believe that these factors might lead consumers to reduce their spending, potentially as soon as the upcoming holiday shopping season.

Housing Costs Reach a 40-Year High

One of the most pressing financial burdens facing Americans today is the cost of housing. Currently, buying and maintaining a home in the U.S. demands more from household incomes than at any time in nearly four decades. The combination of strong demand, limited housing supply, and surging mortgage rates has resulted in housing payments consuming nearly 41% of the median household’s monthly income. This level of expenditure on housing has not been seen since 1984.

The situation is further compounded by the historical context of mortgage rates and home prices. While the Freddie Mac 30-year fixed mortgage rate stands at 7.44%, the median home price has escalated to levels that are proportionally much higher than in the past. The median price of homes over the past two years has ranged from five and a half to six times the median income, a ratio exceeding even that of the mid-2000s housing bubble.

A Surge in Non-Housing Debt

Another dimension of the financial strain is the escalation in non-housing debt. Inflation has significantly impacted spending on major purchases, with balances on non-housing loans more than doubling since 2003. This increase in debt includes a substantial rise in credit card balances, which have grown by approximately 34% since the fall of 2021. This growth in debt is occurring despite an increase in personal incomes since the pandemic, with the national average wage rising by more than $8,000 from 2020 to 2022.

The rise in credit card debt is particularly alarming, as more consumers are falling behind on payments. The rate of serious delinquencies (90 days or more behind on payments) on credit card balances has risen significantly, accounting for the largest share of new serious delinquencies.

Dwindling Covid-Era Savings

An important factor behind the sustained consumer spending has been the high levels of excess savings accumulated during the pandemic. Households saved substantially more in 2020 and 2021 compared to pre-pandemic trends, primarily due to the refinancing boom and low mortgage rates. This accumulation of savings provided a financial cushion that enabled continued spending, even as prices and interest rates increased.

However, as the pandemic waned and normal life resumed, these savings began to deplete rapidly. Consumers, unleashing their pent-up demand for experiences denied during the pandemic, have been spending these savings, leading to a significant reduction in their financial reserves.

Impending Shift in Consumer Behavior

Economists are now pointing to an impending shift in consumer behavior. The combination of high debt, depleted savings, and increased cost of living is reaching a tipping point. Consumers, who have been the driving force of the economy through their spending, may soon find themselves compelled to curtail their expenditures.

The potential impact of this spending slowdown on the U.S. economy is profound. Consumer spending has been a key pillar supporting the economy since the pandemic, and a reduction in this spending could have significant implications for economic growth and stability. As consumers navigate these financial headwinds, their decisions will play a critical role in shaping the economic landscape in the coming months and years.